I have recently been told by a very experienced landlord that 20% of residential tenants leave a property with damages equal to or greater than the security deposit. I felt like the more accurate figure in my experience was half that. We incredulously asked each other how that can be, with so many layers of protection in place to keep the players in the landlord/tenant relationship in line. As this discussion carried on, it became evident that each of us was going to take something new away from this conversation, and both of us would significantly improve our operations in the future.
This was the topic of one of the Lifestyles radio programs I recently hosted which I entitled “The 5 Layers of Protection from Tenant Damages.” This article is an expansion of that show because through discussions with my friend we recognized four additional layers. Hopefully this document is an example of how effective the paradigm of sharing ideas can be. It is also the heart of what a Lifestyles Unlimited® Case Study Event is all about – members sharing ideas, education, information, and resources for mutual benefit. The ideas included here have reduced damages to my properties to a very negligible amount.
Before getting into the heart of the data, we need to get on the same page with some basic landlord/tenant responsibilities. At the conclusion of a lease term, tenants are required to return to the landlord his property in exactly the same condition in which it was received, normal wear and tear excepted. So what exactly does that standard mean? If you transfer your property with a fresh cleaning, does getting a “dirty” property in return constitute normal wear and tear? I don’t think so. When a tenant gets a property with shampooed carpet, for example, it should be returned shampooed. Wearing of the high traffic areas is of course excepted, but dirty is not “normal”. This might be a small point but it is an example of why many landlords considerably overspend on what should be a simple make-ready. You should be happy to return a security deposit, and with effective resident incentives you routinely will.
Layer 1: BPBP, Again!
Product positioning is your first layer of protection. What we mean here is to offer a product with amenities that are slightly above the neighborhood norm, for a slightly lower than average price, and of course ensure that all of the mechanical components of the home are functional and have adequate life expectancy remaining. Sometimes it can seem like the “Best Product, Best Price” mantra is overdone, but the reality is that this is the one thing that attracts your target tenants… those who have choices. If you skip this one the result is that the pool of tenant prospects from which you have to choose are the ones with poor histories.
Best product by the way does NOT mean state of the art improvements. It just means that you match the expectations of the neighborhood, and add one amenity. It could be something as simple as a ceiling fan in the family room, custom shelving in the master closet, a built-in microwave, patio cover, etc.
Concurrently, best price does not mean undercut everyone else by $100 either. Take a look at the neighborhood comparables and determine what the average actually leased amount is, what the average available comp is, and ensure that you are offering the best deal. As little as $10-$25 per month can mean the difference in your property generating all the qualified leads that you need to lease your rental immediately. Lifestyles Quest is a wonderful tool to obtain these numbers.
Layer 2: The Interview
While there are many components to a leasing call or property showing, one of your goals is to establish a rapport. The applicant will oftentimes reveal in casual conversation certain disqualifying information. I have had tenants tell me that their current landlord “wouldn’t fix anything” on numerous occasions, and that they needed to move quickly because when they withheld rent to force the repair, “the stupid jp (eviction) judge” wouldn’t even let them state their case. Now I ask you this – would you try to train someone like this by explaining the lease provisions and court procedures or just move on to someone with qualifying rental history? While you are sitting here reading an article and pondering the point it is an easy question to answer. However, if you violated the primary rule of best product, best price because you either overpriced or under-repaired, and as a result your only prospect is in front of you with cash in hand … well I promise you the decision is 1000 times more difficult.
The second objective of the interview is, when asked about qualification requirements; casually drop into the conversation the statement that it is very easy to qualify for the rental, as you place more emphasis on the rental history verification than anything else. You would be surprised at how quickly some conversations end right there because the prospect with an eviction history screened himself out.
Two words of caution here –
Texas law requires that you provide applicants with written notice of the landlord’s tenant selection criteria “at the time an applicant is provided with a rental application.” (TX Property Code; Title 8, Chapter 92, Subchapter A; Section 92.3515.) The document should establish your minimum standards in areas like criminal history, rental history, employment history, verifiable income, credit history, occupancy, and pets. Additionally, have your applicant either sign a copy of the document for your records, or an acknowledgment. The acknowledgment can be included on the rental application. There are sample forms that Lifestyles members can download in the member’s area of the website.
Federal law prohibits discrimination against protected classes such as race, color, national origin, religion, sex, familial status, and handicap. Make certain that you make no statements, oral or written that violate these statutes; not just because the penalties can be severe, but more importantly because doing so is wrong.
Layer 3: The Investigation
So where is it that you obtain this kind of data? A tenant screening service can provide much of the information for a nominal fee. You charge your applicant an application to fee pay for this. The company that I use is National Tenant Network, a participant in the Lifestyles Unlimited® Vendor Program. They provide criminal information, credit, and eviction information. You also should make multiple telephone calls each to current and past landlords and employers. Use the County Appraisal District’s database to verify ownership of the previous addresses as well.
Layer 4: Pay Up!
Security Deposits are your next line of defense. The very idea of a security deposit is to transfer the risk of a potential neglectful or malicious tenant to the tenant himself. Del Walmsley taught me to evaluate the data retrieved from the screening procedures and use a scaling system for determining deposit amounts. For a low risk tenant that means a deposit equal to one month’s rent. With other applicants that have higher risk factors, additional deposit might mitigate that risk, while other background reports might be so bad that no amount of deposit could convince you approve the application. Make sure though that if you do use this kind of a procedure that you do so correctly. For example, if you need additional security deposit to approve the application, then decline the original submission with the appropriate rejection letter (your screening service will provide you with a sample), but state that you have a “Second Chance Program” for which they do qualify.
Layer 5: Inspections
Periodic inspections of your rental units are encouraged. Now I certainly do not mean that you should show up and say with your clip board and a sharp pencil, or really show up at all. Front exterior inspections are regularly done by the HOA and they will certainly inform you if something is amiss. You can also conduct some maintenance items and have your subcontractor give you a report describing his observations of the property. Examples of these types of services include extermination, ac check-up, touch-up paint, smoke alarm checks, one-time complimentary lawn service, and lease renewal upgrades, like adding or replacing a ceiling fan. This allows you to get 2 – 4 reports on the property per year in addition to adding value to your resident’s stay, and extending the life of some of the mechanical components of the property.
Layer 6: Renter’s Insurance
Renter’s Insurance is one of the most overlooked areas of protection for landlords because the primary purpose of the policy is to cover the tenant’s personal property. However, there is usually a liability clause included in this policy. Attorney Steven Kellman contributing to Inman News writes, “Renter’s insurance is a protection against losses suffered by the tenant caused by the tenant’s negligence or by factors beyond the control of the tenant but for which the tenant could be blamed. Landlords like this because without the insurance, they cannot rely on the tenant to cover significant damages, which they (or their own insurance) will be forced to pay.”
If you choose not to require a tenant to carry this type of policy, at the very least inform them that any insurance that you may have does not cover them or their belongings. Very strongly encourage a renter’s insurance policy as it isn’t really all that expensive. Furthermore, make it easy for your prospective tenants to purchase it by including brochures from an insurance company in your application and welcome packs.
Layer 7: Landlord’s Insurance
The primary topic within this article is protection against tenant damages. You should consider other areas of coverage, like your own liability protection, to insure. The purpose of insurance is to transfer risk so by all means carry appropriate levels of coverage to protect yourself. Make sure that your policy covers the types of damages that you care about. Not all policies are the same, so specifically look for coverage relating to:
• Loss of rents
• Vandalism
• Theft
• Tenant damages
It is customary that because a landlord’s policy does not cover contents of the premises that is much less expensive than a homeowner’s policy on the same structure. Even when including some of these ‘extras’ if they are not standard for your provider, the rates are comparable.
Layer 8: Incentives
When your tenant provides you with their notice of intent to vacate, do not wait to make contact and try to prevent the turnover. If you can’t renew the lease however, give every bit of incentive to the outgoing resident to return the property in leasable condition. Remember from earlier in this article that the property should be returned to you in the same condition that it was in when you leased it – clean!
If you can move someone in the day they move out, go ahead and return the security deposit right away. Because of the expenses associated with moving, like deposits utilities, movers or rented trucks, transfer fees, time off from work, etc., your outgoing tenant will likely be very cooperative if there is a chance to get that deposit back right away versus 30 days later which increases the chances of discovering an item eligible for deduction.
Layer 9: Trading Up
Over time, you will be required to make certain capital improvements to the property. For this reason one of Del Walmsley’s 5 Rules of Single Family Operations is to sell the rental as soon as you can. Realize that capital gain you captured at purchase and move it into your next investment before you have to use some of it to pay for improvements again. By no means is anyone suggesting that you consume all of the life from the property and then dump it to some unsuspecting consumer. We are however proposing that you leave a reasonable amount of usefulness to your buyer who is probably an owner occupant who will be more delicate with it than a tenant would be (again adhering to the best product, best price philosophy even on the sale), and upgrading your portfolio. The reason for this is because it takes us full circle, right back to the beginning where you are doing what? Product Positioning.
